Banking Made Simple:
Review of Audited Accounts for New Advance:
This note is prepared with a view to understand step by step the points to be look into and their relevance for consideration of sanction of advances to the new borrower. The list is narrative and may not include all the points to be considered but definitely gives a direction for some of the important and basic points looked in to before working on the new proposal.
The balance sheet analysis is to be done by calculating all the possible ratios as each and every ratio indicating financial health of the company. There are various ratios and the analysis may be extended to a micro level by calculating all the possible ratios to ascertain the financial health of the company. It is to be remembered that, that ratios gives an indicative information of a particular type of business as such the results of the ratios must be compared with the line of activity of the company. Some of the basic accounting ratios are listed as under:
Current Ratio: (CR)
The same is calculated as Current Assets/Current Liabilities. The minimum accepted level of this ratio for financing is 1.33. The ratio indicates ability of the company to payback its short term liabilities. A high ratio indicates excessive investment in current assets and a low ratio indicates inability of the company to pay back its short term liabilities.
Debt Equity Ratio: (DER)
The same is calculated as Total liability/Total Equity, and also by loan funds/ own funds.
The maximum acceptance level is 1:3. The higher ratio indicates dipropionate and high borrowing than own funds a low ratio indicates more reliance on internal accruals and own funds, thereby limiting the growth of the company.
Inventory Turnover Ratio: (ITR)
The same is calculated as inventory/turnover. This ratio helps to understands the cycle of the inventory covered in to turnover. The higher ratio indicates faster conversion of inventory in to sales and lower ratio indicates delays in converting the inventory in to turnover.
The list of ratio is exhaustive and one can calculate all the possible ratio to understand the financial worthiness, working capital gap of the specific company.
Promoters/Owners Experience in the line of activity.
This will help in understanding the basic knowledge and how they were performing in the same line in their other business. In case, they are new how they acquired the skill and experience to run the business. Their financial standing and reputation in their line of business is also helps in understanding the man behind the work. The same can also be find out from the audited balance sheet of the sister and associated concerns and companies under the same management. Promoters propionate investments in the new venture will also shows their confidence in the business activity under consideration.
Financial Net worth of the Owners/Promoters.
The latest available net worth of the directors, promoters, owners, will definitely indicate their thrust in creating wealth for the company as well as themselves. This will also indicate, their mindset of wither creating the worth by legitimate means or otherwise.
Their timely compliance, for all applicable acts, like income tax, state act. also indicate their mindset of more on compliance based than detection. If they are open to all they will be definitely open the bankers.
Ascertain the Existing Bankers:
The audited financial accounts contains all the borrowings whether short term/ long tem, retail advances or otherwise. The accounts also reflects all the bank accounts maintained. The bankers should ask for balance confirmations, as well as CR report from all the bankers and institutions reflected in the audited final accounts.
Ascertain the Drawing Power as on the Balance sheet date:
Though, we are financing on projections submitted to us in CMA data, it is helpful to ascertain whether the borrower have some DP and its Correct level as on the balance sheet date. The DP available based on the borrowing level will indicate that in case the additional finance given the DP will be available if the same trend continues.
Projection submitted in CMA data.
It worth to look in to the projections given in the CMA data in comparison to the audited final accounts. The audited accounts given the previous year as well as current year figures of all the items in Profit and Loss accounts and Balance sheet. A CMA data is only and extension of the same with an estimation for the current year and projections for the subsequent year. The increase decrease shown in the figures of the CMA data should be backed by sound justification and backed by evidences like orders in hand, agreements etc.
This exercise will help in ascertain the exact requirement and type of finance required i.e. fund-based and or non-fund based.
Balances/Transactions with the Sister Concerns/Associate concerns/ and companies under the same management:
The audited financial results reflects all the details of the concerns as mentioned above. It is necessary to ascertain the reasons of such balance and relevance of the transactions entered in to among themselvesThis will definitely help in monitoring the future such transactions.
Audited financial Accounts of all the companies where the director of this borrower is the Director.
If the same is available the same is looked in to as the best may be presented to the bank for the new sanctions. The purpose of such various concerns also be ascertained.
Transactions in the Account in comparison with the audited Financial Accounts:
If the borrower is existing customer of the bank then transactions in the accounts i.e. turnover in the account and as shown in the audited accounts, additions to the capital, transfer of the funds to other personal accounts maintained, and transaction with the related concerns is to look in to in relation to the figures available in audited financial accounts.
It is good practice, to ask the bank statement of the borrower whether with us or other bank to ascertain the above type of transactions.
Profitability of the Line of Activity and Factors Affecting the Future Profitability:
The percentage of net profit to the turnover as given in the audited accounts and CMA data and if any changes of increase or decrease is shown the reasons for the same. It will be also ascertained whether the profitability will be maintained in case of additional borrowings and whether the profits are such that they can withstand the additional financial charges on account of additional borrowings.
Security Primary/Collateral Available and its value:
The audited financial accounts will given an indication of the primary and collateral security available and its value as on that date. It will also be ascertained whether the security is free form any encumbrance and available for the additional finance.
An Audited Final Account is a door of the Fort and outsider has to study in detail from all the angels before deciding a successful venture in to the Fort.
CA Satish C. Badve
B.Com. F.C.A. D.C.M. D.I.S.A.